From my email outbox, on behavioural economics ...
sadly, behavioural economics is really really plagued with the same sort of pathological incentives as "Freakonomics", because like quirky-dataset regressions, it really lends itself to small-topic research of the sort that will get your PhD completed on schedule and/or produce a stream of publishable[1] papers to demonstrate one's value to a department research assessment exercise. As a result it has basically spent the last twenty years working on producing a theory to describe the behaviour of one particular class of person (economics graduates students) in one particular situation (behavioural economics laboratories) and is nearly there. IMO, behavioural economics is to a significant degree responsible for the suspicion in which interdisciplinary research is held by economics profs, as it appears to me to be chock full of people who have used the psychology department's ignorance of economics and the economics department's ignorance of psychology to play the two off against each other and avoid going into either in any depth[2]. Which is a form of arbitrage, so I suppose they know a bit about economics after all.
The trouble is - as I say, most interesting economics problems are not really about psychology. If it takes 9 minutes of labour and 10c worth of metal to make a widget which sells for $2.50, then the answer to "what is the wage rate in widget manufacture" is going to depend on specific conditions relating to the widget industry, not general theories about altruism. Nearly all the time spent on behavioural economics would be better spent on specific institutional work. It is notable that the puported big success of BE - the "hyperbolic discounting" theory of why people undervalue future benefits and costs - is so transparently nothing more than a redescription of the problem that after ten years it still basically hasn't left the psychology lab (apart from showing up in a couple of Freakonomics papers).
best
dd
[1]Where "publishable" is defined in strictly empirical terms related
to the current academic journal industry and implies no wider
judgement on whether these articles ought to be stuffed in a bottom
drawer somewhere forever.
[2] Apologies to any list members working in the field but come on,
you know what I'm talking about.
[...]
ah yes, I forgot the other tendency of economists - the appropriation of already existing concepts by claiming that it was economists that put them on a rigorous footing. I mean, the Yorkshire Penny Bank was founded in 1859, and the concept of weakness of will was being noted by the Ancient Greeks. British Leyland in the 1960s actually had an automated machine that could split a worker's pay packet into a number of different envelopes of cash, reflecting family preferences for housekeeping, rent and beer money. There's probably a good article for someone in finding out how many of the hard-won results of behavioural finance had already been discovered by Victorian ironmasters.
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dd
Relatedly, something that occurred to me reading this bashing of public choice theorists:
ReplyDeletehttp://socialdemocracy21stcentury.blogspot.co.uk/2013/02/steven-pressman-on-public-choice-theory.html
Economics and the economisant (as in marxisant) sciences have this strange tendency to encounter something it can't explain (in this case voting) and classify it as a brilliant example of how smart economists are. It has this in common with the Catholic notion of divine mystery.
viz also the "equity premium puzzle" which in any other discipline would be known as the "equity returns modelling failure". But in financial economics, a substantial proportion of the profession literally decided that it was reality that was at fault and that equity returns were higher than they "ought" to be, with fairly profound consequences for pension fund investment over the next couple of decades.
ReplyDeleteThere's probably a good article for someone in finding out how many of the hard-won results of behavioural finance had already been discovered by Victorian ironmasters.
ReplyDeleteThe local dock in my native neck of the woods famously has a clock tower (c. 1870) to chime the shifts and ensure no excuse for lateness; the inward face was deliberately kept blank in order to keep the workers from clockwatching.
(There's bleak comedy in noting that if psychology departments were au fait with economics, they'd probably shut down.)